Why 64 Percent Is the Golden Mean in the Housing Market: View

By the Editors -
Jun 1, 2011

Who should own a home? From the late
1960s to the mid-1990s, the answer in the U.S. was surprisingly
consistent. Homeowners were savers who could muster significant
down payments, with incomes solid enough to enable them to start
repaying mortgages right away. During war, peace, boom times and
recessions, the national rate of home ownership remained steady
at 64 to 65 percent of households.

Starting in 1995, a home-ownership craze began. The belief
took hold that rising home ownership meant a better society, no
matter how fragile new buyers’ finances might be. Down payments
started to matter much less; the same was true of income, which
came to be ignored through no-documentation "liars’ loans." By
late 2004, a record 69.2 percent of American households owned
their homes.

The U.S. housing market’s subsequent collapse has shown
ubiquitous ownership to be a costly delusion. In the past nine
quarters, more than 2.1 million homes have been foreclosed on.
Lenders have lost countless billions of dollars in mortgage
defaults or modifications. Yesterday brought news that the
S&P/Case-Shiller index of urban home prices fell 3.6 percent in
March from a year earlier, to the lowest level since 2003. The
American housing slump isn’t finished yet.

A decade ago, three of the European countries with the
fastest-growing rates of home ownership were Spain, Ireland and
Greece. All three had boosted their rates above 80 percent,
compared with a European average of 64 percent. Since then, each
of those countries has become ensnarled in defaults, recessions
and struggles to manage national debt. By contrast, Germany,
with a home-ownership rate below 50 percent, has come through
the upheaval essentially unscathed.

Owning or Renting

In Europe and the U.S., the balance between owning and
renting is making a painful return to healthier levels. The U.S.
home-ownership rate has ebbed to 66.4 percent, a level last seen
in the late 1990s. The next step is to fix the logjam of
foreclosed homes. The best hope may be the current settlement
talks among regulators, lenders and loan servicers regarding
abuses. A streamlined foreclosure process would let the housing
market stabilize more quickly, albeit at a lower level.

Are U.S. lenders ready to return to the stricter norms of
past generations? Recent signals are ambiguous. This spring,
financial regulators proposed that loans meeting a handful of
tests, including down payments of 20 percent or more, be
designated as qualified residential mortgages, or QRMs. Such
loans would be treated as extra-safe instruments that original
lenders could securitize in full, making them more appealing to
investors.

Skin in the Game

This rule would also force mortgage lenders to keep “skin
in the game,” meaning they would have to hold about 5 percent
of any non-qualified loan on their books, presumably forcing
them to more carefully evaluate borrowers’ ability to repay.

Mortgage lending groups hate this idea, naturally. They say
most borrowers couldn’t meet such a strict standard. According
to the Mortgage Bankers Association, difficulties in
securitizing non-QRM loans could add to credit costs, causing
such loans to carry interest rates as high as 8.8 percent next
year. If so, the association warns, millions of Americans could
be priced out of the market.

Such worries seem overblown. If strong incentives exist for
borrowers to rustle up bigger down payments, more will do so.
Loans that almost qualify for QRM status are likely to attract
market support, quickly making them more affordable than
mortgage bankers predict. As for risky non-QRM loans, if they
end up carrying uncomfortably high interest rates, that is
market discipline at work.

A sound mortgage market, in which it takes work and a
demonstrated ability to save to qualify for favorable credit,
can thrive for generations. Trying to revive the anything-goes
attitude of bubble-era lending in an effort to funnel more than
65 percent of Americans into home ownership can only lead back
to instability.